Margin Trading Grows In India’s Stock Market

Buying shares on borrowed money rose by more than a third this year in the cash segment of the Indian stock market as tighter regulations help formalise such trading.The net scripwise outstanding through margin trading jumped nearly 40 percent since Jan. 1 to Rs 5,071 crore as of Dec. 16, according to daily disclosures on the National Stock Exchange.Margin trading is gaining strength in the cash or delivery-based segment. According to NSE data, such leveraged buying and selling of shares account for nearly 14 percent of the average cash turnover or around Rs 37,000 crore.Margin trading has grown as funding sources have improved with brokers using either own money or funding through commercial banks or non-bank financial companies, according to Deven Choksey, promoter of KRChoksey Group and MD, KR Choksey Investment Managers Pvt. Ltd. The change came after funding regulations became stricter, he said..Brokers allow investors to buy more than they can afford through the margin trading facility for a fee. Investors are required to make an upfront deposit, called margin, with the broker. They can leverage positions by borrowing funds. After the trade, they have to mark-to-market the margin or provide additional margin within two days.Such trading is allowed only in group-1 stocks—mostly large caps. These securities must have an average cost of buying and selling—or mean impact cost—of 1 or less; and should have traded on at least 80 percent of the days for the previous 18 months.The cost of margin trading ranges between 12-18 percent on an annualised basis, said Choksey, adding investors normally take this facility for five to 30 days.An analysis of the last one-year data reveals that top five stocks traded through the margin facility are from the Nifty 50 Index..Yes Bank Ltd. is the most traded and among the top 10 financed for margin trading. And the outstanding amount rose as the share price fell..The market regulator has tightened norms to curb the risk in margin trading and safeguard investors’ interest.From Oct. 1, the Securities and Exchange Board of India asked brokers to keep clients shares that are not fully paid either in client unpaid shares account, client margin trading demat account or client collateral demat account. A broker can’t pledge these shares, preventing the misuse of client money.SEBI also made upfront margin and extreme loss margin payments mandatory from Jan. 1..Watch | Indians are increasingly trading on borrowed money.

Margin Trading Grows In India’s Stock Market

Margin trading is gaining traction as stricter rules come into force.

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